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CA Intermediate · Advanced Accounting · AS 14 Accounting for Amalgamations

Dhruv Engineering Ltd absorbed Eklavya Components Ltd in an amalgamation in the nature of purchase. Eklavya's items at agreed values were: fixed assets ₹7,00,000, inventory ₹2,50,000, debtors ₹2,00,000 (including ₹60,000 due from Dhruv Engineering itself) and cash ₹50,000. Its liabilities were creditors ₹1,50,000 and 10% debentures ₹2,00,000. Dhruv Engineering issued 60,000 equity shares of ₹10 each at ₹12 per share and paid ₹1,00,000 in cash. The ₹60,000 mutual debt is cancelled on amalgamation. What is the goodwill or capital reserve arising?

Goodwill of ₹30,000 arises. Consideration is ₹8,20,000 (₹7,20,000 in shares plus ₹1,00,000 cash). Net assets are ₹7,90,000 after removing the ₹60,000 mutual debt from assets and deducting liabilities of ₹3,50,000. The excess of consideration over net assets is goodwill.

  1. AGoodwill ₹30,000Correct
  2. BCapital reserve ₹30,000
  3. CCapital reserve ₹70,000
  4. DGoodwill ₹90,000

Explanation

Consideration = 60,000 × ₹12 = ₹7,20,000 + ₹1,00,000 = ₹8,20,000. Assets taken over = 7,00,000 + 2,50,000 + 2,00,000 + 50,000 = ₹12,00,000; less the cancelled mutual debt ₹60,000 = ₹11,40,000. Liabilities = ₹3,50,000, so net assets = ₹7,90,000. Goodwill = 8,20,000 − 7,90,000 = ₹30,000. Ignoring the cancellation gives net assets of ₹8,50,000 and a capital reserve of ₹30,000, which is wrong. Deducting the mutual debt twice gives ₹90,000 goodwill, also wrong.

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